Dallas Fed: regional energy sector active, but cautious

(The Center Square) - Companies operating in the nation’s most productive oil and gas region report business activity surged to a four-year high in the second quarter of 2026, though rising operational costs and regulatory burdens threaten long-term growth, according to the Dallas Federal Reserve Bank’s most recent quarterly survey.

The Dallas Fed’s business activity index for the Eleventh District, which includes the entirety of Texas, northern Louisiana, and southern New Mexico, jumped from 21.0 in the first quarter to 46.1 in the second quarter, according to the survey.

Activity was strongest in four years, with the recent increase driven by a modest advance in the oil production index, which rose from 0 in the first quarter to 15.0 in the second.

The survey was in the field from June 9 to June 17, coinciding with tense negotiations between the U.S. and Iran as the two countries worked to establish a memorandum of understanding to end military hostilities.

A majority of the 127 responding energy firms, which included 82 exploration and production operators and 45 oilfield services companies, said the rising costs are squeezing their financial margins.

For oilfield services firms, the input cost index surged from 34.9 to 64.4. None of the respondents saying that expenses had decreased in the second quarter. Drillers said they were scrambling to reactivate equipment sidelined since 2023, and one services executive noted that "competition for experienced field crews is increasing, and customers are hiring our people."

An index measuring the responding firm’s attitudes to capital expenditures in the next year dropped to zero, showing that the region’s producers are freezing long-term investment plans.

"Capital decisions will be made based on a reward of a return, not the opportunity to supply," one oilfield services executive said, adding that "supplies of rental tools and services are tight and suppliers are demanding a return on investment."

The executives said excessive regulation and infrastructure bottlenecks are causing them to carefully limit their investment expenditure. In the next 12 months, 45% of the Permian Basin respondents view excessive regulation as a "significant constraint" on drilling while another 45% cited insufficient natural gas pipeline capacity as a major deterrent to investments.

Concerns over geopolitical uncertainty and skepticism about long-term stability in the Middle East could trigger broader inflationary pressures. "I do not expect any clean resolution to the Iran war," one support services executive remarked, suggesting that the conflict "will likely be another decade-plus quagmire that will push inflation and add further instability to energy prices.”

Another survey respondent said international tensions are making long-term forecasting impossible, noting that "rapid changes in international geopolitics make for a cloudy windshield view of the future direction of oil price and demand."

Exploration and production expenditures throughout the Eleventh District generate local tax revenues that fund schools, roads, infrastructure and emergency response through state severance taxes. When that activity slows, local government budgets often feel the squeeze.